Market extends losses as food inflation remains high

The key benchmark indices slumped to 4-1/2-month lows after the latest data showed food price index remained at elevated levels, stocking fears the Reserve Bank of India (RBI) will continue to hike interest rates this year. Market underperformed mostly higher global stocks. All the sectoral indices on BSE were in the red. Index heavyweight Reliance Industries declined for the third day in a row.



The key benchmark indices had dropped nearly 1% on Tuesday, 25 January 2011, after RBI hiked key short term interest rates at a quarterly policy review. The stock market was closed on Wednesday, 26 January 2011, on account of Republic Day.

The market breadth, indicating the health of the market was weak, compared with positive breadth earlier in the day. The BSE 30-share Sensex was down 285.02 points or 1.5%, off close to 400 points from the day's high and up close to 30 points from the day's low. The Sensex settled below the psychological 19,000 mark, after regaining that level at the start of the day's trade.

Stocks were volatile as traders rolled over positions in the derivatives segment from January 2011 series to February 2011 series ahead of the expiry of the near-month January 2011 contracts. The January 2011 derivatives contracts expired today, 27 January 2011.

The market pared gains after a firm start triggered by higher Asian stocks. The market cut losses after dipping into the red to hit fresh intraday lows in morning trade. The market came off lows in mid-morning trade. The market hit a fresh intraday low in afternoon trade. The market extended losses in afternoon trade. The market further extended losses to hit fresh intraday lows in mid-afternoon trade. The market slumped in late trade to hit 4-1/2-month low.

The Supreme Court asked the government on Thursday to probe billion of dollars of illegal funds stashed by Indians abroad, ratcheting up the pressure on the Congress-led coalition to fight corruption in high places.

Foreign institutional investors (FIIs) bought shares worth a net Rs 428.30 crore on Tuesday, 25 January 2011, higher than an inflow of Rs 194.90 on Monday, 24 January 2011. FII outflow in January 2011 totaled Rs 2823.20 crore (till 25 January 2011). FIIs had bought equities worth Rs 2049.60 crore in December 2010.

The food price index rose 15.57% and the fuel price index climbed 10.87% in the year to 15 January 2011, government data on Thursday showed. In the prior week, annual food and fuel inflation stood at 15.52% and 11.53%. The primary articles price index was up 17.26% in the latest week, compared with an annual rise of 17.03% a week earlier.

RBI deputy governor Subir Gokarn today, 27 January 2011, said the bond yield curve was reflecting the inflation expectations and there was no need to revisit the statutory liquidity ratio. The effect of policy actions taken by the Reserve Bank of India in the past is yet to be fully seen, he said. But, RBI Governor D Subbarao said demand side pressures were abating due to monetary policy actions.

The results announced so far showed that the combined net profit of a total of 555 companies rose 20.5% to Rs 43821 crore on 20.2% rise in sales to Rs 368530 crore in Q3 December 2010 over Q3 December 2009.

European shares reversed initial losses on Thursday, shrugging off ratings agency Standard & Poor's downgrade of Japan's credit rating to AA-minus from AA. The key benchmark indices in France, Germany and UK rose by between 0.18% to 0.47%.

Asian stocks rose after US Federal Reserve policymakers voted unanimously to maintain a $600 billion bond-buying plan to fuel an economic recovery. The key benchmark indices in China, Indonesia, Japan, South Korea and Taiwan rose by between 0.22% to 1.47%. However, key benchmark indices in Hong Kong and Singapore fell by between 0.03% to 0.27%.

Standard & Poor's on Thursday cut Japan's long-term sovereign credit rating to AA minus from AA, and reaffirmed the short-term ratings at A-1 plus. It said in a statement that it "expects Japan's fiscal deficits to remain high in the next few years, which will further reduce the government's already weak fiscal flexibility." It said its outlook on the long-term rating is stable, reflecting its view that "Japan's strong external balance sheet and monetary flexibility partially offset the pressures stemming from the fiscal side.

Japan's annual export growth picked up more strongly than expected in December as shipments to China jumped to a record high and auto demand in the United States recovered, reinforcing views that the economy will soon emerge from a lull.

Trading in US index futures indicated that the Dow could gain 20 points at the opening bell on Thursday, 27 January 2011. In US market action overnight, the S&P 500 closed at a 29-month high on Wednesday led by gains in tech and commodity shares, as investors largely ignored the US Federal Reserve's lukewarm economic assessment. The Fed said after a two-day policy review that high unemployment still justifies a $600 billion bond-buying program that has helped equities rally in the last few months.

The Fed left interest rates steady near zero in unanimous vote. Fed policy makers said that signs of an accelerating recovery don't warrant reducing efforts to reduce unemployment that is hovering near the highest levels since the early 1980s. Meanwhile, the latest economic data showed new US single-family home sales rose in December to their highest level in eight months.

Back home, to control surging inflation, the Reserve Bank of India (RBI) at its quarterly policy review on Tuesday, 25 January 2011, raised repo rate by 25 basis points to 6.5% and the reverse repo rate by 25 basis points to 5.5%. Repo rate is the rate at which the RBI lends money to banks. Reverse repo is the rate at which RBI borrows funds from banks. The central bank held the cash reserve ratio steady at 6%.

"As high food inflation persists, the prospect of it spilling over to the general inflation process is rapidly becoming a reality," Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in the policy document released on Tuesday, 25 January 2011. The RBI lifted its headline inflation projection for March 2011 to 7% from 5.5% previously. The central bank said inflation is likely to resume its moderating trend in the first quarter of 2011-12. The RBI stuck with its 8.5% GDP growth forecast for the current fiscal year, but with an upside bias.

The RBI extended the period for offering additional liquidity support to commercial lenders by more than two months in view of the existing cash crunch in the banking system. Banks can now access the additional liquidity support, equal to 1% of banks' net demand and time deposits, until 8 April 2011, as compared to 28 January 2011, when the facility was due to expire. The frictional liquidity shortage is expected to ease as government balances adjust to the expenditure schedule. However, banks need to focus on the underlying structural cause of liquidity tightness arising out of the gap between the credit and deposit growth rates, the RBI said.

The combined risks from inflation, the high current account deficit (CAD) and fiscal situation contribute to an increase in uncertainty about economic stability that consumers and investors will have to deal with, RBI said. To the extent that this deters consumption and investment decisions, growth may be impacted. While slower growth may contribute to some dampening of inflation and a narrowing of the CAD, it can also have significant impact on capital inflows, asset prices and fiscal consolidation, thereby aggravating some of the risks that have already been identified, it said.

It is important to emphasise that the role of monetary policy in the current inflationary situation is confined to containment and prevention of food and energy prices from spilling over into generalised inflation and anchoring inflation expectations, the central bank said. Unless meaningful output enhancing measures are taken, the risks of food inflation becoming entrenched loom large and threaten both the sustainability of the current growth momentum and the realisation of its benefits by a large number of households, the RBI said.

Another challenge to effective management of inflation by monetary policy arises from the persistence of a large fiscal deficit, the central bank said. While the government may succeed in raising receipts, both from high tax buoyancy and one-off sources, the real measure of fiscal consolidation lies in improving the quality of expenditure. If the government is able to commit more resources to capital expenditure, it will help deal with some of the bottlenecks that contribute to supply-side inflationary pressures. With reference to revenue expenditure, while large and diffused subsidies may contribute in the short term to keeping supply-side inflationary pressures in check, they may more than offset this benefit by adding to aggregate demand, the RBI policy statement said.

Capital flows, which so far have been broadly sufficient to finance the CAD, may be adversely affected, the RBI said. Faster than expected global recovery may enhance the attractiveness of investment opportunities in advanced economies, which may impact capital flows to India. This may increase the vulnerability of India's external sector. Hence, the composition of capital inflows needs to shift towards longer-term commitments such as foreign direct investment (FDI), the RBI said.

The BSE 30-share Sensex was down 285.02 points or 1.5% to 18,684.43, its lowest closing level since 8 September 2010. The index fell 313.40 points at the day's low of 18,656.05 in late trade. The index gained 117.24 points at the day's high of 19,086.69 in early trade.

The S&P CNX Nifty was down 83.10 points or 1.46% at 5,604.30, its lowest closing level since 7 September 2010. The Nifty hit low of 5,594.95 in late trade.

The BSE Mid-Cap index fell 1.88% an underperformed the Sensex. The BSE Small-Cap index declined 1.35% and outperformed the Sensex.

All the thirteen sectoral indices on BSE were in the red. The BSE Realty index (down 3.57%), Healthcare index (down 2.61%), Metal index (down 1.98%), banking sector index Bankex (down 1.85%), Consumer Durables index (down 1.81%), and Oil & Gas index (down 1.61%), underperformed the Sensex. The BSE PSU Index (down 1.47%), Capital Goods index (down 1.42%), Auto index (down 1.3%), Power index (down 1.27%), IT index (down 1.17%) and FMCG index (down 1.14%), outperformed the Sensex.

The market breadth, indicating the health of the market, was weak, compared with positive breadth earlier in the day. On BSE, 1905 shares declined while 956 shares advanced. A total of 110 shares remained unchanged.

Among the 30-member Sensex pack, 28 declined while the rest gained.

BSE clocked turnover of Rs 3055 crore, lower than Rs 3629.03 crore on Tuesday, 25 January 2011.

Index heavyweight Reliance Industries (RIL) was down 1.62% to Rs 943, reversing initial gains. The company said during market hours today, 27 January 2011, RIL and IL&FS will develop model economic township at Jhajjar, Haryana.

The RIL stock has fallen recently on concerns about slow ramp up in gas production from the KG-D6 field. Gross natural gas production from RIL KG-D6 block, off India's east coast, declined 5.7% to 55.8 million metric standard cubic metres per day (mmscmd) in Q3 December 2010 from Q2 September 2010, as the company continues to struggle to find solution to problems related to the reservoir.

RIL's net profit rose 28.14% to Rs 5136 crore on 5.15% rise in net turnover to Rs 59789 crore in Q3 December 2010 over Q3 December 2009. Higher refining and petrochemicals margins boosted the performance. RIL's gross refining margin (GRM) improved to $9 per barrel in Q3 December 2010 from $5.9 per barrel in Q3 December 2009. The GRM was also higher compared to $7.6 per barrel in Q2 September 2010. The result was announced after trading hours on Friday, 21 January 2011.

Pharma stocks fell on profit taking. Pfizer, Sun Pharmaceutical Industries, Cipla, Dr Reddy's Laboratories and Ranbaxy Laboratories declined by between 0.01% to 3.89%.

Lupin shed 5.25% after Q3 result. The company announced during market hours today that consolidated net profit rose 39.49% to Rs 224.03 crore on 19.09% rise in total income to Rs 1513.60 crore in Q3 December 2010 over Q3 December 2009.

Consumer durables stocks edged lower. Blue Star,Titan Industries, Rajesh Exports, Videocon Industries and Gitanjali Gems fell by between 0.22% to 8.78%.

India's largest FMCG firm by sales Hindustan Unilever declined 3.78%, extending Tuesday's 5.45% slump after net profit declined 1.8% to Rs 638 crore on 12% rise in net sales to Rs 5027 crore in Q3 December 2010 over Q3 December 2009. The result was announced during trading hours on Tuesday.

Hindustan Unilever (HUL)'s operating margin was lower by 320 basis points (bps) in Q3 December 2010 over Q3 December 2009 due to a steep rise in input cost, and brand investments. Commenting on the results Harish Manwani, chairman of HUL said that in an inflationary environment, the company will manage the business dynamically through judicious pricing actions and increased focus on cost effectiveness while ensuring that the company remains competitive in the market place.

Among other FMCG stocks, ITC, Nestle India, United Spirits and Dabur India fell by between 0.09% to 2.6%.

Marico rose 2.53% in a weak market after consolidated net profit rose 11.78% to Rs 69.53 crore on 22.13% increase in net sales to Rs 817.74 crore in Q3 December 2010 over Q3 December 2009.

Some metal stocks fell on profit taking. Sterlite Industries India tumbled 5.28% on reports an arbitration panel has struck down Sterlite Industries' call option to acquire the balance 49% stake in Bharat Aluminium Company.

Among other metal stocks, Tata Steel, Hindalco Industries, Jindal Steel & Power, Steel Authority of India and Hindustan Zinc fell by between 0.73% to 3.67%.

JSW Steel fell 4.99%. The company announced during market hours today consolidated net profit fell 32.11% to Rs 291.72 crore on 21.95% rise in total income to Rs 6006.45 crore in Q3 December 2010 over Q3 December 2009.

Mahindra & Mahindra declined 4.87%. The company announced after market hours today that it launched India's next generation pick up 'Genio'.

India's third largest IT exporter by sales Wipro declined 1.6%, extending recent losses triggered by resignations of joint-CEOs of its information technology business. The resignations were announced at the time of announcing third quarter results before market hours on Friday, 21 January 2011.

Wipro's net profit as per International Financial Reporting Standards rose 10% to Rs 1319 crore on 12% increase in total revenue to Rs 7829 crore in Q3 December 2010 over Q3 December 2009.

India's second largest software services exporter Infosys declined 1.81%, extending Tuesday's 0.74% losses. Consolidated net profit rose 2.5% to Rs 1,780 crore on 2.3% rise in revenues to Rs 7106 crore in Q3 December 2010 over Q2 September 2010 as per International Financial Reporting Standards. The result was announced before market hours on 13 January 2011.

India's largest software services exporter TCS rose 0.62%, reversing initial losses. The stock hit a record high of Rs 1221 on Monday, 24 January 2011. On a consolidated basis, net profit rose 9.25% to Rs 2369.83 crore on 5.35% increase in total income to Rs 9857.56 crore in Q3 December 2010 over Q2 September 2010. The result was announced after trading hours on 17 January 2011.

Interest rate sensitive realty stocks declined after the Reserve Bank of India raised the key policy rates on Tuesday. DLF, Indiabulls Real Estate, Unitech and HDIL fell by between 0.59% to 5.42%.

Banking stocks declined on worries earnings might be hurt as rising cost of deposits might squeeze interest-rate margins. India's largest private sector bank by net profit HDFC Bank declined 1.67%. The bank announced after market hours today net profit rose 32.9% to Rs 1087.83 crore on 28.85% rise in total income to Rs 6357.78 crore in Q3 December 2010 over Q3 December 2009.

India's largest private sector bank by net profit ICICI Bank fell 2.06%, extending 4.21% losses on Tuesday.

India's largest bank by net profit and branch network State Bank of India fell 0.96%. Chairman O.P. Bhatt said on Tuesday the bank need not raise its rates after the Reserve Bank of India increased policy rates by 25 basis points.

Larsen & Toubro (L&T) fell 1.19%. The company said during market hours on Tuesday that it signed a joint venture with Kobe Steel for tyre and rubber industry equipment.

Among other capital goods stocks, Punj Lloyd, Thermax, Bhel, BEML and ABB fell by between 1.29% to 3.54%.

Midvalley Enterprises clocked highest volume of 3.38 crore shares on BSE. Sanraa Media (1.23 crore shares), Cals Refineries (71.97 lakh shares), C Mahendra Exports (69.89 lakh shares) and SVC Resources (51.72 lakh shares) were the other volume toppers in that order.

Midvalley Enterprises clocked highest turnover of Rs 196.62 croreon BSE. Tata Coffee (Rs 130.32 crore), State Bank of India (Rs 116.42 crore), Reliance Industries (Rs 110.51 crore) and C MAhendra Exports (Rs 93.72 crore) were the other turnover toppers in that order.